Cigarette Makers And U.S. Seek Deal
After Government Setback,Judged Urged Both Sides To Take Matter to Mediator
By JOHN R. WILKE and VANESSA O'CONNELL
Staff Reporters of THE WALL STREET JOURNAL
March 22, 2005; Page A3
WASHINGTON – The Justice Department and the nation's largest cigarette makers have met secretly with a court-appointed mediator in an effort to settle the government's sprawling civil fraud and racketeering case against the companies.
The settlement talks mark a striking turn in the suit, now in its sixth month of trial here, and they emerge as both sides are feeling new pressure to resolve the case.
U.S. District Judge Gladys Kessler privately urged both sides to forge a settlement after a federal appeals court last month dealt a serious setback to the government, people close to the case said. The appeals-court ruling, if it is upheld, narrows the remedies available to the government in the case and robs it of its most potent weapon: Forcing the cigarette makers to disgorge $280 billion in profit allegedly earned from smokers who took up the habit before age 21.
The two sides have met at least once, since the appeals-court ruling, with the mediator, Eric Green, a Boston University professor who brokered the settlement in the Microsoft Corp. antitrust case three years ago, the people close to the case said. It couldn't be determined whether progress was made, but the parties are expected to meet again, these people said.
The government's civil fraud and racketeering case against the cigarette makers was announced in 1999 by President Bill Clinton. It sought in part reimbursement of Medicaid spending for tobacco-related ailments, but a judge threw out that claim. That left the government with the civil fraud and racketeering claims. The federal suit is separate from the $206 billion settlement struck in 1998 between the tobacco industry and 46 states (the four other states earlier settled for a total of about $40 million) and Washington, D.C.
The introduction of a mediator comes at a time when both sides have new incentives to settle.
While the Bush Justice Department has continued to pursue the case it inherited from the Clinton administration, President Bush himself is thought to have reservations. After the appeals-court ruling, the White House may now be looking for a way to end the case against the companies, which have been major contributors to the Republican Party.
The talks also come as Congress is again considering a comprehensive tobacco policy. Legislation that would give the Food and Drug Administration new authority over tobacco sales and marketing was introduced in both houses of Congress last week, and has attracted broader support than it had last session, when the effort fell short.
At the Justice Department, former White House Counsel Alberto Gonzales has become attorney general, succeeding John Ashcroft, whom industry executives believe opposed settling the case when the two sides first discussed it before the trial began. Mr. Gonzales hasn't spoken out on the case, but he did approve the request from the government's trial team to have the full appeals court rehear the disgorgement appeal, those close to the case said.
The Justice Department declined to comment, as did the mediator, Mr. Green, and a spokeswoman for Altria Group Inc., which owns Philip Morris USA, the nation's largest cigarette maker. Other defendants -- including R.J. Reynolds Tobacco Holdings Inc., which recently merged with Brown & Williamson to form Reynolds American Inc.; Vector Group Ltd.'s Liggett Group Inc.; and Loews Corp.'s Lorillard Inc. -- all declined to comment yesterday.
Altria has a pressing need to settle the U.S. case as it plans for a huge spinoff of its Kraft Foods unit to shareholders. While each of the cigarette makers still faces scores of suits filed by individual smokers, only a few major cases are pending, including a class-action suit in Florida and a separate light-cigarette suit, both now on appeal. For Altria, these cases have complicated the effort to sell assets because of possible court judgments, and the company's chief executive, Louis Camilleri, has made it clear he will await resolution of these three cases before launching the restructuring.
Altria, whose domestic tobacco unit accounts for half the cigarettes sold in the U.S., has been preparing to split itself into two or three entities after it resolves outstanding tobacco litigation. In addition to tobacco units Philip Morris USA and Philip Morris International, Altria owns about 85% of Kraft, whose brands range from Oreo cookies to Oscar Mayer processed meats.
Phillip Morris USA's associate general counsel, William Ohlemeyer, calls the fraud charges "wrong on the law...and a mediocre substitute for regulation" that should be crafted by Congress, not the courts. He refused to comment on possible settlement talks, but added, "if someone put a reasonable alternative in front of us, then we'd work hard to find common ground."
The legislation now before Congress includes many of the restrictions that would likely be on the table in settlement talks. The bills would give the FDA authority to change the language of current cigarette health warnings and substantially enlarge their size; require disclosure of ingredients added to tobacco products; and regulate, or ban, terms such as "light" and "low tar." The proposed legislation also would mandate changes in the design of tobacco products to protect the public health, including authority to remove harmful ingredients, ban the sale of candy and fruit-flavored cigarettes, aggressively target youth smoking and other measures.
In the U.S. trial, the tobacco companies recently opened their joint defense, which is being heard without a jury in district court here. The judge has already heard scores of witnesses and reviewed hundreds of exhibits.
Judge Kessler, despite her earlier rulings favoring the government, has recently pressed the U.S. trial team to acknowledge the impact of the appeals court's ruling, which sharply narrowed the remedies still available if the government prevails in the case. "It is not an overstatement" to say that the Feb. 4 decision "struck a body blow to the government's case," she said.
But the judge has also noted that the panel's 2-1 decision, written by U.S. Circuit Judge David Sentelle, included a strong dissent asserting that the majority ignored Supreme Court precedent as well as "Congress's plain language." The government has said it will seek a rehearing of the issue by the full appeals court here, but legal experts say it is unlikely to be successful. If it is rebuffed by the full court, the government could seek Supreme Court review.
After the appeals court ruled that disgorgement of profits should be off the table, the Justice Department's trial team offered other remedies including funding of broad smoking-cessation campaigns, public education on addiction and second-hand smoke and youth-smoking prevention. Most recently, the U.S. has also said it may seek removal of tobacco executives.
Antismoking advocacy groups encouraged the government to continue the case. "This case still has the potential to put in place far-reaching measures to reduce tobacco use," said Vince Willmore, a spokesman for the nonprofit Campaign for Tobacco-Free Kids here. "The best way to achieve strong public-health remedies is by pursuing the case," he said.
Meanwhile, in a separate tobacco case, the U.S. Supreme Court yesterday denied Philip Morris USA's request to review a $10.5 million judgment against it in a lawsuit brought by an individual smoker, Patricia Henley, who started smoking at age 15, before any health warnings appeared on cigarette packages.
The high court's decision to turn away the case without a review ends a temporary stay of the judgment. Philip Morris is expected to pay $10.5 million in damages plus $6.2 million in interest, marking only the second time it has been forced to pay in a case brought by an individual smoker. |
